Firms urged to diversify supply chains

MANILA, Philippines ? Protectionist policies against onshoring production activities should be pursued with caution, considering the current fragility of global supply chains, according to a UK-based think tank.

In a report, macroeconomy research firm Oxford Economics said that amid a volatile supply environment, companies should instead diversify foreign sources of goods for production.

“The differing paces of countries easing restrictions and the risk of renewed lockdowns make synchronizing global supply chains difficult until most of the world has successfully contained the virus and started to rebuild their economies,” said the firm’s lead industry economist Stephen Foreman.

“The pandemic has also highlighted how stretched and fragile supply chains have become, which are often concentrated in a few key manufacturing hubs. This lack of supply-chain diversification could be a risk to the recovery if another wave of outbreak occurs and leads to sudden factory closures,”  Foreman said.

Reshoring production as a means to cope with disruption in the supply chain is not expected to eliminate risks associated with the pandemic, but instead concentrates them domestically and reduces competitive advantage.

“Over the medium term, policymakers and firms should be cautious about pursuing protectionist policies and reducing reliance on foreign suppliers by reshoring production,” Foreman said.

The concentration of supply chain risks are seen to be greater for sectors such as textiles, electronics, aerospace, and other transport equipment as a small number of economies make up the bulk of international supply chain.

“One way to achieve greater resilience is to diversify supply chains. This may include holding domestic stocks of essential products – such as foods and medicines – as well as broadening the foreign sources of supply,” Foreman said.

Amid the pandemic, several sectors are expected to be better-positioned to recover from a slump because of solid pre-pandemic balance sheets, relatively shallower drops in output during the downturn and well-diversified supply chains.

These include makers of essential goods such as food and beverages as well as chemical and pharmaceutical industries.

“Pharma should also see strong R&D and manufacturing activity as the world races to find a vaccine,” the study said.

In contrast, recovery will be slower for automobile and aircraft manufacturers.

Aircraft manufacturers face significant headwinds because of the slow rebound in air travel and lingering vulnerability to supply-chain disruptions.

There is also cause for concern about recovery in the auto sector as it was already struggling prior to the pandemic because of weak global sales, disruptions from new emissions standards, and profitability pressures as the industry gears up for new technologies.

“The auto sector is likely to have been the hardest-hit manufacturing sector during the downturn,” the report said.